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Question 3: Consolidation & control (15 marks) In the following situation, discuss and determine whether a parent-subsidiary relationship exists, and which entity, if any, is
Question 3: Consolidation & control (15 marks) In the following situation, discuss and determine whether a parent-subsidiary relationship exists, and which entity, if any, is a parent. You must fully explain and support your answer. This includes identifying and discussing each of the important facts or considerations in the case. Huckleberry Ltd is a major financing company whose interest in investing is return on the investment. Huckleberry Ltd does not get involved in the management of its investments. If an investee is not managed properly, Huckleberry Ltd sells its shares in that investee and selects a more profitable investee to invest in. It previously held a 40% interest in Smith Ltd as well as providing substantial convertible debt finance to that entity. Recently, Smith Ltd was having cash flow difficulties and persuaded Huckleberry Ltd to convert some of the convertible debt into equity so as to ease the effects of interest payments on cash flow. As a result, Huckleberry Ltd's equity interest in Smith Ltd increased to 51%. Huckleberry Ltd still wanted to remain as a passive investor, with no changes in the directors on the board of Smith Ltd. These directors were appointed by the holders of the 48% of shares not held by Huckleberry Ltd. (15 marks)
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